* Banks not out of the woods yet as numbers can be deceptive (Adds comment from the European Banking Authority)

By Laura Noonan

LONDON, April 15 (Reuters) - The tens of billions of euros euro zone banks set aside for loan losses in their latest annual accounts may have substantially reduced the chance of institutions failing ECB stress tests in the next few months.

A total of 71.5 billion euros ($99.3 billion) was set aside in 2013 by the 20 biggest listed banks involved in the exercise, a Reuters analysis of their new annual reports shows. Many also boosted capital ratios by raising cash and hoarding profits.

If replicated across the 128 lenders subject to tests the European Central Bank aims to complete by October, it could mean no bank will fail or be forced to raise large amounts of new capital. Such limited consequences helped discredit previous tests by EU financial watchdog the European Banking Authority (EBA) - one reason the ECB is keen to show that its new exercise will truly be tough on the region's banks.

While some analysts have suggested that a failure by the ECB to force the closure of any euro zone bank after its own tests could again undermine the credibility of the exercise, many see it as more important that the ECB's scrutiny creates a stronger banking system - something the data suggest is happening.

"A lot of action has been taken," said Carla Antunes da Silva, head of European banks research at Credit Suisse. "I don't think you need to have a day of reckoning where a big bank needs to fail.

"A few years ago, if you had asked investors what they wanted to see from stress tests they would have said 'bodies' -but not any more," she added.

A survey last month of 200 clients of her own bank had, she said, found very few seeing it as essential to the credibility of the ECB stress tests that a major bank should fail.

ECB President Mario Draghi himself has highlighted progress already made since they learned of his plans and said this month he was "pretty confident" that the testing regime would "find a stronger banking system than we had before announcing it".

The EBA, which will coordinate this year's stress tests with the ECB, said investors were interested not just in whether banks pass or fail but their sensitivity to stress and how supervisors deal with the results.

"The credibility of the EU-wide stress test rests on transparency; market participants will determine for themselves how supervisors and banks are dealing with remaining pockets of vulnerability."

UNANSWERED QUESTIONS

Back in January, analysts at Keefe, Bruyette & Woods published a report showing 27 of the ECB's 128 banks failing a simulated stress test, though of these only Commerzbank was among the top 20 listed entities. The German lender has said it is "well prepared" for the exercise.

One senior official at a banking regulatory body in Europe told Reuters that he and his peers would not be concerned if the ECB review failed to force significant remedial action at major banks. However, several experts, speaking privately, emphasised that it could throw up surprises and problems.

One person who has been involved in bank tests before said large provisions already taken by banks do not mean they are out of the woods. One indicator of that was the ratio to equity of bad loans against which provisions have yet to be made.

Reuters analysis shows non-performing loans not covered by provisions make up about a third of the equity across the 20 banks. In the cases of three banks, however, bad debts not provided for exceeded their total equity. If those banks' collateral were to prove worthless and no repayments were made on the loans, those banks' equity would be entirely wiped out.

That would be an extreme outcome, however.

Nonetheless, such issues highlight uncertainties in the process. Karl Whelan of University College Dublin, who advises the European parliament's economics committee, said: "There's no doubt that banks have been building up their capital ratios.

"But these ratios often hide a lot."

The core tier 1 ratio, a key measure of financial strength, rose to an average of 11.85 percent at end-December across the 20 banks whose accounts Reuters analysed - up from an average 10.77 percent a year earlier. Using a slightly different tool, the ECB requires banks have a ratio of at least 8 percent.

The 20 banks account for about 60 percent of the risk-weighted assets held by the 128 banks, and range in size from Spain's Santander down to those like Bank of Ireland and Italy's Mediobanca. The group does not include large banks that do not have listed shares.

The ratios that banks themselves disclosed for 2013 were nudged higher as the 20 raised more than 16 billion euros in equity and booked post-tax profits. Excluding a huge 14-billion euro loss announced by UniCredit of Italy, triggered by provisions ahead of the ECB tests, the other 19 posted a total profit of 20 billion euros. Since the turn of the year, the banks have continued to sell assets and raise capital.

WILD CARD

The main wild card in the ECB's tests, and their main enhancement over the EBA's previous efforts, is an assessment of whether banks have recognised all their impaired loans and set aside enough to cover losses. If the ECB concludes the loans are overvalued, this will push capital ratios down.

The 20 banks examined classed 9.1 percent of their loans as non-performing at the end of 2013, against a non-performing ratio just below 8 percent a year ago.

The 71.5 billion euros the 20 set aside to deal with loan losses last year was down 20 percent on provisions they took in 2012, when business was tougher. Collectively, they have now taken enough provisions to cover losing 55 percent of their bad loans.

However, much remains obscure in the detail of how banks state their non-performing loans, or NPLs: "It's ... very hard to assess provisioning data, given the differences across countries and banks in their approaches to classifying and accounting for NPLs," said Karl Whelan in Dublin.

Those uncertainties notwithstanding, investors have piled back into the equity and debt of banks with the highest NPL ratios, with Italian and Spanish banks leading share price gains among European banks and National Bank of Greece making its return to the bond market.

"This hunt for yield has made people say 'we really do think the worst is behind us'," said Edmund Shing, a London-based portfolio manager with BCS Asset Management, noting a new willingness to buy relatively risky assets.

Ian Robinson, head of credit at asset manager F&C, said: "Most people are comfortable that Europe's household banks have taken the primary steps necessary to clean their balance sheet by writing down NPLs and raising capital.